Considered Wealth

Issue 07 - February 2017

The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst those changes was the introduction of a $1.6 million transfer balance cap which limits the tax exemption for assets funding superannuation pensions. Currently all earnings from assets generating income to fund pension streams are tax free.

This new limit will apply from 1 July 2017 and creates additional responsibilities for SMSF trustees. The main issues you need to be aware of are:

All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.

Those not receiving a superannuation pension on 1 July 2017, will have a transfer balance cap created when you first receive a superannuation pension.

The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are
recorded in a transfer balance account.

Credits are created by:

The value of super assets supporting income streams on 30 June 2017,

Starting new superannuation income streams from 1 July 2017 onwards,

The value of reversionary income streams where an individual becomes entitled to them, and

Notional earnings accruing to excess transfer balance amounts.

Debits are created by:

Commutations of superannuation pensions,

Structured settlement payments contributed to superannuation, and

Certain payments arising from family law splits, fraudulent or void transactions.

Reversionary pensions will count towards the cap, but members will have a 12 month period from the date of death to deal with the reversionary pension before a credit arises and counts towards your cap.

Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase which will likely require the commutation of the relevant pension which has exceeded the cap.

Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.

Any amounts in excess of a member's personal transfer balance cap can continue to be maintained in your accumulation account in your fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.

Alternatively, you would be able to withdraw the excess from your super fund and invest it outside super which may be in a less tax-effective environment, as any earnings from this investment would be taxed at your marginal rate of tax rather than the 15% within your super fund.

Initially, trustees will have a grace period where amounts up to $100,000 over the $1.6 million cap will not incur the excess transfer balance tax provided the breach is rectified within six months.

Approaching 1 July 2017, you may wish to structure your asset holdings to be in a position to optimise the $1.6 million transfer balance cap, especially between spouses.

It is also important to know that there is transitional capital gains tax relief for superannuation assets currently in a pension stream. This capital gains tax relief will ensure that any capital gain accumulated on affected superannuation assets will be deferred to a later time when the asset is sold.

The relief is the ability to reset the cost base of existing super assets for retirees who have pension accounts with balances of more than $1.6 million. When you reset the cost base, the asset's tax value is changed to its market value.

Given that members will need to shift assets from a currently tax exempt pension account to an accumulation account and pay capital gains tax when investment assets are sold, for example those members currently receiving a Transition To Retirement Pension income stream, the cost base of the assets is critical.

The relief is not automatic and needs to be applied on an asset-by-asset basis. Therefore, you would reset any assets to market value if that asset has increased in value but would not reset an asset to market value if it has decreased in value as you would lose the benefit of a capital loss.

In most cases, 30 June 2017 will be the date the relief will be applied. Your super fund will need to get market valuations of all your assets anyway to prepare your financial statements and tax return and it also allows the assets to remain in the tax exempt environment for as long as possible.

Careful planning is required to ensure you do not miss out on this once-off opportunity and that the right assets are chosen to apply this relief against.

Defined benefit income streams include lifetime pensions and annuities. If you receive a defined benefit income stream in excess of $100,000 in a year, the excess component is taxed differently to amounts received which are under $100,000 per year.

If your defined benefit income stream is paid from an untaxed source (for example Super SA's Triple S fund), the 10% Australian Super Income Stream Tax Offset will be limited to the first $100,000 of your income stream. The excess above $100,000 will be taxed at your marginal rates without the benefit of the offset.

The complication arises when you have an account based pension (for example, from your self managed superannuation fund) as well as receiving a defined benefit income stream. A value will be placed on the defined benefit income stream to calculate your total superannuation pension assets to make sure they do not exceed the $1.6 million transfer balance cap.

The calculation to value a defined benefit income stream is 16 times your annual income stream.

As an example, if you were receiving a defined benefit income stream of $50,000 per year, your income stream would be valued at $800,000 ($50,000 x 16) for the purposes of the transfer balance cap. If you also had $1,000,000 in your self managed super fund as at 30 June 2017, you will only be able to leave $800,000 in your account based pension account and commute the remaining $200,000 back into an accumulation account.

The defined benefit income stream is counted towards your $1.6 million transfer balance cap first as lifetime pensions cannot be commuted.

How can we help?

If you are receiving a lifetime annuity or pension and wish to seek advice about how the changes may affect you leading up to the 30 June 2017 deadline and beyond, please contact your Brentnalls SA advisor to discuss your particular requirements in more detail.

The Government has lowered both the concessional (pre-tax) and non-concessional (after-tax) contribution limits from 1 July 2017.

Pre-tax contributions will be limited to $25,000 per annum for all taxpayers from 1 July 2017 and after-tax contributions will be limited to $100,000 per annum.

Below is a summary of the changes for both concessional and non-concessional contributions.

Concessional (Pre-tax) contributions:

The concessional contributions cap is lowered to $25,000 per year for all taxpayers from 1 July 2017.

Taxpayers who were aged 49 or over on 30 June 2016 can make up to $35,000 in pre-tax contributions in 2016/17.

Those aged under 49 on 30 June 2016 can make up to $30,000 in pre-tax contributions in 2016/17.

Some of these changes may require you to adjust your contribution strategies going forward especially reviewing of your salary sacrificing arrangements.

This will most likely be the case if you have a superannuation balance of over or close to $1.6 million or were planning on making significant contributions to superannuation in the next few years.

Non-concessional (After- tax) contributions:

The rules allow the opportunity to bring forward a further two years of contributions – making it possible to contribute up to $300,000 in one year.

For the 2016/17 year, it is still possible to make a contribution of up to $180,000 for one year, or to bring forward a further two years' contributions – so you are able to make a contribution of up to $540,000. If you do not use this full limit of $180,000 or $540,000 in the 2016/17 year, then you will be limited to the $100,000 annual and $300,000 bring forward caps for future years.

Where the bring forward of contributions has been triggered before 1 July 2017, transitional contribution caps may apply.

If you are receiving a lifetime annuity or pension and wish to seek advice about how the changes may affect you leading up to the 30 June 2017 deadline and beyond, please contact your Brentnalls SA advisor to discuss your particular requirements in more detail.

If you have a balance of $1.6million or more in your superannuation at 1 July 2017, you will not be able to make any further after-tax contributions in future years.

When approaching the $1.6million cap, care will need to be taken with the bring forward rules as these are restricted by the new $1.6 million balance restriction.

The 2017 financial year is the last year that members can make a non-concessional contribution of up to $540,000, including in-specie contributions, so if possible members should look at maximising your contributions to utilise any unused portion of your current cap by the end of this financial year, 30 June 2017.

A summary table has been included below:

How can we help?

If you are concerned that the Government's changes to contributions for superannuation are going to affect you, please contact your Brentnalls SA advisor to discuss your particular requirements in more detail.

Last year we completed an exercise analysing the Self Managed Superannuation Funds (SMSFs) that we provide services to, and thought there were some interesting generic statistics to share:

Jun-15

Jun-14

Average Fund Balance

$1,332,387

$1,176,588

Average Investment Mix

Cash

5.11%

5.61%

Cash Equivalents (Fixed Interest)

9.06%

8.81%

Australian Listed Securities (including listed unit trusts)

56.16%

55.81%

Foreign Listed Securities (including listed unit trusts)

0.64%

0.52%

Australian Unlisted Trusts

9.43%

9.84%

Foreign Unlisted Trusts

0.04%

0.00%

Australian Property

16.99%

16.62%

Other Assets

2.57%

2.79%

Total

100%

100%

Average earnings

10.00%

11.00%

Average Expense Ratio

0.98%

0.88%

Average Deductible Contributions per fund

$32,835

$28,046

Average Undeducted Contribution per fund

$58,224

$50,716

Average growth % in total fund balance

13%

13%

The following conclusions can be drawn from this analysis:

SMSFs continue to grow in both prevalence and size.

Management expense ratios are, on average, below 1% of fund balance.

Investment profiles tend to be from balanced to aggressive with few examples of conservative profile. This likely reflects members and trustees looking for growth, franking credits and exposure to direct property and hence the increasing use of SMSFs.

The information provided in this newsletter does not constitute advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances. Brentnalls is not a partnership or a joint venture. Instead, the business of Brentnalls SA is independently owned and operated and it is an independent member of the Brentnalls Affiliation of Accounting Firms. Individual member firms do not accept responsibility or liability for the actions or inactions of any other individual member firm.

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